In 2016, the government of Zimbabwe through the Office of the President and Cabinet (OPC), embarked on a project targeted at improving the ease of doing business in Zimbabwe.
One of the areas identified as part of this initiative was the modernisation and alignment of the country’s legislation to the national Constitution.
The Companies Act was identified as one of the key pieces of legislation, which had a direct link to the ease of doing business as it is the principal piece of legislation that regulates how corporates operate in Zimbabwe.
The current Companies Act (Chapter 24:03), originally came into effect in 1951 with subsequent amendments being made to the Act as part of efforts to modernise it and align it to current business practices.
However, given that the backbone of the current Companies Act dates back to 1951, it has now become outdated and several of its shortcomings have been noted, which include its failure to make provision for use of information and communications technology in the company registration and regulation process.
Information and communications technology has now become a basic requirement for most business operations, which means the Companies Act is not supporting this latest trend in business.
Also, the current Act has outdated financial reporting requirements and has at the same time failed to keep abreast of current corporate governance practices. The Zimbabwe economy is currently dominated by small to medium businesses, but the Act does not make provisions for legal entity that would suit the needs of this small enterprises, which would go a long way in formalising these business operations.
The shortcomings of the Companies Act that have been raised above, the Ministry of Justice, Legal and Parliamentary Affairs with the assistance of the World Bank as their technical partner, coordinated efforts towards the drafting of a new Companies Act, which is intended to replace the current one.
The government of Zimbabwe post the events of November 2017, reignited efforts to have the new Companies Act project finalised following the realisation that the Act is one of the critical aspects in the drive of “Zimbabwe is open for business” mantra being pursued. The following key provisions have been included in the new bill, which will change the way companies are expected to conduct their day to day businesses:
The draft Companies Act bill has made provision requiring private limited and public limited companies to prepare their financial statements using International Financial Reporting Standards (IFRS), which will be prescribed for use in Zimbabwe by the Public Accountants and Auditors Board (PAAB) in terms of the Public Accountants and Auditors (PAA) Act.
By having this provision, it means that financial statements prepared by companies in Zimbabwe would be in accordance with internationally accepted standards, which would go a long way in ensuring the ease of doing business in Zimbabwe as international investors will be provided with financial information that is understandable to them.
To reduce the risk of the Companies Act becoming outdated should International Financial Reporting Standards be updated, the bill has become scalable to any of these changes by making reference to financial reporting standards that may be adopted by the PAAB from time to time.
Auditor Appointment and rotation
Given the recent scandals in South Africa and globally surrounding the auditor’s independence in discharging the auditors mandate of providing assurance over financial reporting, it also became imperative that the bill had robust provisions on this area. The draft bill specifically requires auditors not to take up non-audit services, which may potentially impair their independence when they then perform audit services.
In further enhancing auditors’ independence, the bill also mandates the rotation of the audit partner after a period of five consecutive years of auditing a company. These provisions made in the bill are in line with current global best practices around safeguarding the auditors’ independence, with countries such as South Africa and the United Kingdom legislating requirements around auditor rotation.
The draft bill has legislated the requirement for all public companies to have the audit committee as a statutory committee of the board of directors. This requirement is in line with globally accepted governance practices and further cements the requirement in the National Code on Corporate Governance Zimbabwe, which also requires the establishment of an audit committee.
The audit committee would be chaired by an independent non-executive director who should not be the chair of the board and the bill requires the committee to have at least three independent non-executive directors. These requirements are expected to enable the audit committee to exercise its duties independently with no influence from executive management.
The audit will be responsible for the selection, remuneration, and terms of engagement of an external auditor, who, in its judgment, is independent of the company, subject to ratification by the shareholders.
The committee will also be required to monitor the independence of the company’s external auditor by being given the authority to pre-approve any non-audit services that may be provided to the company by the auditors. These requirements on monitoring the auditors’ requirements are expected to ensure that auditors’ independence is maintained all the time and creates a clear line of communication and reporting for auditors, which ensures that they do not report directly to executive management.
Over and above, the responsibilities of the audit committee will also be to monitor the company’s financial reporting and legal compliance processes. The legislation of the audit committee duties and responsibilities are expected to empower the committee to better discharge on their mandate.
The draft Companies Act bill has included provisions on civil penalties that may be levied on the directors of a company should they fail to keep proper accounting records of a company as required in the Act.
This requirement is likely to ensure that there is accountability in the way that businesses are run. More so, the bill will help protect stakeholders’ in the company by having proper financial records being kept. By having proper accounting records being kept will also assist the Zimbabwe Revenue Authority (ZIMRA) in their tax collection efforts.
The above analysis provides a quick snap shot of what is coming in the new companies act and it is encouraged that businesses and individuals take time to go through the bill and assess how the new requirements will impact their businesses. Also, at this stage the bill is still open for further refinement before it is passed into law which makes it even more critical for stakeholders to provide their input into this process.